International inspectors on Thursday applauded Greece's efforts to exit its debt crisis, granting a fresh 9 billion euro payment from an EU/IMF bailout scheme, but urged bolder reforms to turn the economy around.
In their most positive assessment so far that offered an antidote to market scepticism, IMF, ECB and European Commission officials said Athens would likely meet this year's deficit cutting target, though risks remained.
"This was a very ambitious programme with a lot of front-loading, and the good news is that it is being implemented as agreed," the IMF's mission chief for Greece Poul Thomsen told Reuters in an interview.
Officials from the so-called 'Troika' told reporters at the end of an inspection visit ahead of the release of the second tranche of the 110 billion euro ($145 billion) programme in September that they now eyed reforms in energy, banking and the public sector.
"Despite considerable progress on a very vast array of areas, key challenges and risks remain," said Servaas Deroose, deputy director general for economic and financial affairs at the European Commission.
The officials said these were crucial to restore investor confidence and allow Greece to return to international bond markets sometime next year as planned.
Greece's debt crisis has shaken the euro zone and effectively blocked Athens from markets, with the cost of borrowing briefly hitting 1,000 basis points over German bunds. Spreads have been relatively steady at around 750 basis points since Prime Minister George Papandreou asked for aid in May.
Five-year credit default swaps were last at 695 basis points versus 130 for Italy, the benchmark for the euro zone's peripheral economies. This means it would cost 695,000 euros to insure 10 million euros of Greek debt against default.
Analysts said Greece now may actually come close or even meet a budget to cut its budget deficit from 13.6% of GDP in 2009 to 8.1% this year, thanks to bigger than expected spending cuts offsetting low revenues.
"People were fearing that the programme was not succeeding just a few months ago. So, it's definitely a positive development," said Giada Giani of Citigroup. "It does not mean that the challenges are not there anymore.
The biggest spending risk areas are state hospitals, municipalities and state-owned companies, which have long burned holes in the budget.
A weak economy was also a challenge. Despite the government's more optimistic views of a milder than expected recession, the IMF and the EU said there was no reason to revise a 4% GDP decline. Greece plunged into its first recession in 16 years in 2009 after years of booming growth.
Inflation has jumped to over 5% in May and June, much higher than the euro zone average, partly due to value added tax (VAT) and other tax hikes, showing weak competitiveness and highlighting the need to open up professions and markets.
The EU and the IMF revised their inflation forecast for this year to 4.75% from an earlier 1.9%projection but said they expected the pace to slow to 1.5-2% next year.
After a slow start, Prime Minister George Papandreou's socialist government has bitten the bullet and imposed draconian austerity measures, cutting public salaries and hiking taxes.
It has launched long-delayed pension and labour reforms, despite strikes and protests that have disrupted tourism, transport and services, and eroded its popularity.
On Thursday, the finance ministry was evacuated after a bomb threat just as the minister was due to begin a news conference on the troika visit.
Opposing the reforms, seamen blocked ports at the start of the key tourist season in May and truckers went on strike for a week affecting fuel and goods supply, but the government stood its ground and ordered them back to work.
Thomsen welcomed the government's firm stance: "What this has shown to me is that this government is serious about reform, it is not going to back off just because a special interest group is opposing reforms," he said.
But analysts say the next clash with workers, expected to be with the powerful union at the state PPC utility opposing liberalisation, will be much tougher.
Deroose said Athens must come up with a plan to free up the energy market by the end of the year, adding the banking sector also needed restructuring. He said he government was preparing a strategic review of lenders in September.
Analysts said they would be eyeing longer term reforms to assess if Greece is making real progress in turning the economy around.
"Bringing the deficit below 3% of GDP (by 2014) is obviously going to take a long time, so the risk is whether the strength of the reforms and the strength of the fiscal tightening remains in place over the coming years," said Diego Iscaro of IHS Global Insight. "Especially because the political situation is likely to deteriorate ... if unemployment remains high and people are more unwilling to make sacrifices," he added.